2/14/2006 @ 12:00PM

This Is Your Brain On Money

Six years ago, Stanford brain scientist Brian Knutson accidentally set neuroscience and economics on a collision course. Knutson wanted to use MRI scanners–the same devices used in medical diagnosis–to literally peer inside people’s heads as they experienced intense emotions. He tried showing volunteers pictures of nude and decapitated bodies. But those reactions paled compared with what happened when he offered people cash.

In 2000, Knutson published the first paper using magnetic resonance imaging to photograph what goes on in the brain as people deal with money. Within a year, his findings and others had given birth to a new field called neuroeconomics. Neuroeconomics seeks to replace the abstract, hyper-rational creatures that populate traditional economics with real–sometimes irrational–people. Neuroeconomists use devices, like MRIs, to observe the behavior of real people buying and selling things.

“You can actually get inside the black box,” says Knutson.

His paper gave neuroeconomics its first real surprise finding. Traditional economics predicts that people should use money to acquire things that might make them happy. Money–in and of itself–shouldn’t make people happy. But Knutson found more primal forces at work. Offers of cash caused a surge of dopamine in a tiny piece of neural machinery called the nucleus accumbens–a structure as ancient as backbones that plays a key role in addiction. The surge wasn’t caused by a wad of cash already in people’s back pockets, but instead by the opportunity to make some easy money.

“It helps explain why people have such bizarre attitudes toward money,” says George Loewenstein, an economist at Carnegie Mellon University. “According to standard economic theory, money is a means to an end. When you get money, you shouldn’t experience immediate happiness. What all the scanning research is showing is that people get immediate pleasure and pain from obtaining and losing money.”

Armed with MRI scanners that measure blood flow in the brain and carefully structured games involving playing cards and real cash, both neuroscientists and economists have been watching what actually happens when people make economic decisions. Skeptics say the new field has yet to completely upend economic theory and merely has delivered many small findings at the edges of economic theory. Some also complain that the neuroeconomists are placing too much confidence in simplified economic exchanges that cannot reflect the complexity of real life.

But the studies are a first step to mapping out how the brain deals with money. In a study published in Science in December, Caltech economist Colin Camerer and colleagues asked why people tend to be afraid to invest in stock markets outside their own country. For Americans, this isn’t a big problem, because the U.S. is such a global economy. But it can be a big problem in small nations.

“People tend to be way over-invested in their own country’s stock,” Camerer says. “If you’re in Brazil or Sweden, you’re way under-diversified.”

The Caltech researchers did an experiment with two decks of red and blue cards. Volunteers were told one deck was composed of ten red cards and ten blue cards; another had an unknown mix of red and blue cards. They were told if they could guess the color of the first card drawn from either deck, they would get $10. Most people decide to make their guesses about the deck where they know there’s an even mix of red and blue cards.

However, this is one of those odd cases where logic differs from common sense, because the odds of guessing the color of that first card are 50-50 whether you know the makeup of the deck or not. (It may be a little easier to see why if you imagine the deck is all one color. You have a 50-50 chance of guessing that color correctly.) If you’re experiencing a bit of cognitive dissonance here, you’re not alone.

Our brains literally rebel against this experiment, and, using their MRI scanner, Camerer and his colleagues figured out why. A completely different part of the brain is used to make decisions about the deck where the odds seem knowable–where the risk can be gauged–unlike decisions about the ambiguous deck. Thus people, sometimes irrationally, tend to favor markets where they think they know the risks (say their home country’s stock market) and shy away from places where they don’t know the mix.

Camerer and his colleagues went a step further. Using a database of patients with brain injuries kept by researchers at the University of Iowa, they found five patients in whom the relevant brain areas had been destroyed by stroke or other injuries. These people were just as willing to bet on both decks–an abnormal response that actually matched up with the odds.

Similar kinds of games, always played with real money and often using MRI scanners, have shed light on economic decision making in ways that seem difficult to believe. Researchers at the Baylor College of Medicine decided to look at how people in an economic relationship–like an investor and his stockbroker or two executives negotiating a deal–decided to trust each other.

The Baylor researchers gave one volunteer cash and let him give it to a “trustee.” The trustee was given more money and decided how much to give back to the volunteer. They repeated the exchange several times and found that they could pinpoint particular areas of the brain that turned on when the investor thought the trustee was, well, trustworthy.

“What do we know about the biology of trust?” asks Ernst Fehr, a neuroeconomist at the University of Zurich. “Basically zero. Biologists didn’t know how to measure trust, and now we bring the two disparate worlds together. That’s neuroeconomics. It’s as much a contribution to neurobiology as to economics.”

Fehr went a step further with the same experiment, finding volunteers who were willing to take a blast from a nose spray containing the hormone oxytocin, which is involved in pregnancy and appears to help facilitate social bonds. The oxytocin-dosed investors became much more trusting–perhaps too much so. In fact, some investors continued to give the trustees cash, even if they were being ripped off.

Other research has sought to measure exactly how employees react to punishment and reward, why people seem to value money they’ve earned over money they’re given, and why and how people lie. Marketers have turned to the new field for insight (see: “In Search Of The Buy Button“), andsuch experiments could even shed light on mental illness.

As MRI technology gets better and experiments become more nuanced, neuroeconomics stands to gain even more steam. Critics complain that any good neuroscientist could have guessed many of the field’s results. Brian Knutson, who helped get the ball rolling in the first place, takes issue with that accusation.

“We can see things smaller and faster than ten years ago,” he says. “We couldn’t even divine these findings from invasive rat research.” He adds, “It’s happening fast.”